Social security should be reformed to allow private investment, and workers, not the Federal government, should be the ones doing the investing. Every worker should be able to invest a portion of the current social security tax through a personal retirement account, along the lines of a 401(k) plan in the private sector. In this way, workers could build financial wealth through social security--not just promises of future benefits to be made good by future taxpayers.

With the development of modern financial markets, the nation can transform social security into a vital program that is of economic value to the workers it covers and to the nation as a whole. U.S. financial markets channel literally trillions of dollars each year into productive investments, and a wide range of investment products and services have been developed that are attractive to ordinary working men and women. Allowing workers to invest a portion of their social security taxes in private capital markets and to draw on these products and services to build retirement protection holds the potential for enhancing retirement income security and generating a stronger national economy in the twenty-first century.

These are some of the many benefits offered by a system of personal retirement accounts:⁽¹⁾

-- First, personal accounts would offer workers the prospect of higher rates of return and more secure retirement incomes.

-- Second, workers would own their accounts and, as a result, would have a legal claim to their contributions and investment earnings that is secured by the force of law. They would have the peace of mind of knowing that the money they set aside for retirement was theirs, period, shielded from political manipulation. There are no such protections under our current system.

-- Third, workers at all earnings levels, rich and poor alike, would be able to accumulate financial wealth and to build estates with which to better their lives and the lives of their children. Workers who now rely almost exclusively on wages during their working years would become shareholders, able to enjoy the benefits of capital ownership in the U.S. economy and to be freed from their almost complete reliance on government transfers in retirement.

-- Fourth, with personal accounts, social security would be depoliticized to a considerable extent.

-- Fifth, workers could tailor the riskiness of their investment funds to their personal needs and circumstances--their willingness and ability to take risk, given their age, their work prospects, their private pensions and other savings, and other important factors.

-- Sixth, personal accounts would enhance public understanding about social security and facilitate retirement income planning--they would give workers something they could understand and build upon.

For each of these reasons, a system of personal retirement accounts would be most beneficial to low-income Americans who have few if any financial resources of their own and who are most dependent on our current system.

Another benefit of personal accounts, which are managed by competing financial institutions, is that investment funds would tend to flow toward their highest valued uses--not toward politically-favored uses. The development of new investment products and services for small savers would be encouraged.

Proponents of private investment, whether by individuals or by government, agree that rates or return on invested funds would be higher than under our current system. Where we part company is on whether workers--or an account in the Federal Treasury--should capture the higher expected returns and whether workers or the Federal government should decide how much risk to take.